How Boards Manage Risk During CEO Succession

Indra Nooyi
Seismic shifts in business are making CEO successions tougher—as a lot of boards are discovering right now. Here’s how some boards are dealing with the change.

One important consideration for boards can be the “personal risk orientation” of candidates, especially for a company that will be changing course. “Maybe the company is mature and needs to revamp something to grow, so they’re looking for a different mindset” than the current CEO’s, says Dayna Harris, partner in Farient Advisors, a management consulting firm in Los Angeles.

A Thorough Search

To thoroughly weigh the competencies candidates need and then winnow the field, the directors and experts we consulted suggest these six steps in identifying and assessing candidates:

Widen your horizons: Just as boards can overlook good candidates, they can overlook how the company’s competitive set is changing. “The most dangerous kind of disruption comes from outside the industry, that you didn’t imagine would hit your industry,” Kesner says. For instance, how many directors of health services companies really saw Amazon as a potential competitor until the e-commerce giant recently purchased a mail-order pharmacy?

In identifying the leader capable of taking the company into the future, boards need to resist the temptation to focus on what the company needed in the past. “Because of innovation and disruption, your business may need a different skill set in the chief than you have in the company today,” says Nichole Jordan, a national managing partner for accounting and consulting firm Grant Thornton. “CEOs need to be a bit more anticipatory about the future and be a driver of innovation, which is a newer development for the CEO role. Some people even say CEOs need to be able to clear their plate and focus entirely on the future and innovation. And that ties back to the attributes you’re looking for.”

Use data to drill down: Technology can ease the task of more carefully analyzing succession candidates. Predictive analytics can help boards assess internal potential successors, telling directors about the financial value of initiatives and operations that inside executives have launched or overseen. And for potential outsiders, “risk sensing” can help identify and evaluate innovators and luminaries at competitors and in other industries, says Jordan.

“All of this is much more measurable, and technology can get you the information that reduces the bias that can naturally happen when a CEO wants to put his or her [favorite] individuals into the succession process versus what might be best for the company,” she says.

Balance the C-Suite: An important component of determining CEO selection criteria is to consider how a new CEO would fit with the rest of the C-level team. “Boards are operating against a mosaic of executive leadership and the team, not just the existing CEO,” DDI’s Smith says.

And unlike, say, a new professional football coach who typically gets to select his own staff of assistants, new CEOs inherit a company’s existing top officers. Paradoxically, this consideration may be even more important for candidates from within.

“Even if you think you’ve got the right internal candidate, that also shifts an organization’s balance in the executive suite, because you’ve got different strengths in each of the roles,” says Susan Gallagher, president and CEO of talent consultancy BPI group. “The top leader might be not quite as strong in some areas as others, but the company most likely has a No. 2, No. 3 or No. 4 with the right skill set to bring that to the team. If one of those people steps up as the successor, you’ve got to assess the impact of that.”

Explore diversity: Boards need to cast their net for the next CEO into unprecedented places. “Is this the right leadership pool?” asks Joe Ungemah, North American practice leader for talent management and organizational alignment for consultancy Willis Towers Watson. “If there’s no diversity, that may be an issue for the company, whether it’s gender, ethnicity or someone’s background, whether it’s finance, operations or a different business unit that’s not typical.”

Stephanie Resnick, chair of the directors & officers’ liability and corporate governance practice group at business law firm Fox Rothschild, explains, “When you diversify the candidates for a particular position, you’re going to get people with a different look-see, and it’s going to be someone who has different skills and observations and brings a different thought process to the table. The thing that is so critical is getting people who think differently, on a different model and [who] might pick up on things differently than what could be a fairly insular group.”

New imperatives—including the digital transformation of just about every industry and the increasing importance of talent and culture in most companies—also are creating new lenses for considering backgrounds that might not have come into play before. “In the past,” Ungemah says, “maybe a head of IT or HR couldn’t have been a key potential successor. But in this world of disruption, that isn’t necessarily the case.”